The New Digital Domain

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THE NEW DIGITAL DOMAIN

How the Pandemic Reshaped Geopolitics, the Social Contract and Technological Sovereignty

POLICY REPORT SEPTEMBER 2020 CONTENTS

03 EXECUTIVE SUMMARY

04 DIGITALIZED AND PRIVATIZED: GEOPOLITICS IN THE PANDEMIC

09 DRIVERS AND IMPLICATIONS OF THE DIGITAL ECONOMY

13 A FRACTURING SOCIAL CONTRACT

18 CONTACT TRACING AND TECHNOLOGICAL SOVEREIGNTY

22 RECOMMENDATIONS AND TOPICS FOR EXPLORATION

cgc.ie.edu THE NEW DIGITAL DOMAIN 3

EXECUTIVE SUMMARY

The COVID-19 pandemic, besides triggering the most Today’s biggest winners are the big tech companies, who severe economic crisis since the Great Depression, is represent the lion’s share of the most valuable companies accelerating technological trends that were well in the that run on data, algorithms and apps rather than making before its outbreak. The Great Lockdown physical labor, but have also managed to utilize the exposed the digital divide between frontier and under-governed nature of the digital domain to non-frontier firms, with the former group being able avoid paying tax and social security. The societal to provide services and goods no longer available within flipside of the growing digital gaps between winners traditional markets. The growing concentration of and losers has been skyrocketing inequality and the power and wealth in the hands of a few global hollowing-out of the middle class—something that digital companies will shape global and domestic in the short term the pandemic is likely to exacerbate. politics in the immediate future.

Globally, the pandemic has increased geopolitical THIS REPORT ANALYSES THESE SHIFTS, rivalry and underlined the decline of the US as a PROPOSES A SERIES OF RECOMMENDATIONS superpower. At the same time, it has highlighted the FOR GLOBAL AND ECONOMIC GOVERNANCE, fact that geopolitical confrontation is increasingly AND IDENTIFIES OPPORTUNITIES TO taking place in the digital domain and among IMPROVE THE SOCIAL CONTRACT IN THE private companies. The information space has been DIGITAL ERA. overloaded by an ‘infodemic’ and cyberattacks directed at hospitals, research institutes and universities have soared in the race to discover and market a vaccine.

Domestically, states are struggling with a loss of technological sovereignty in terms of governing data and unilaterally taxing the winners of the digital economy. Some of the largest European governments have been unable to implement their own contact-tracing protocols due to the stranglehold of Apple and Google. At the same time, there are serious concerns regarding data privacy in both centralized contact tracing as well as using the Apple/Google protocol should such national protocol be imple- mented, which further underlines the importance of data privacy in the twenty-first century. THE NEW DIGITAL DOMAIN 4

DIGITALIZED AND PRIVATIZED: GEOPOLITICS IN THE PANDEMIC DIGITALIZED AND PRIVATIZED: GEOPOLITICS IN THE PANDEMIC 5

The “Unipolar moment” with the US as the sole While it is still early to gauge the full impact of the superpower has been fading in recent years, due to both pandemic on the US, both domestically and inter- the rise of revisionist powers and a general diffusion of nationally, the results of a survey of 982 US international power. Both Russia and China have become increasingly relations professors may be illuminating.3 92% saw that assertive, and the challenge to the US is now more COVID-19 was making the US less likely to be widely severe. In economic terms, the US has never had an respected in the international system, and 76% believed antagonist with the same economic power as China. In that the US is less likely to be seen as a state with un- nominal terms, Chinese GDP is 66% of US GDP (and matched material power and capabilities in the future. greater in PPP terms), whereas the GDP of the Soviet Union in 1980 was 40% of the US GDP, and Nazi Germany only 26%.1

Donald Trump has contributed to the worsening of relations with US partners—most notably the EU—as well as attempted to weaken the foundations of international order. Trump “wants to destroy the alliances, trading relationships and international institutions that have characterized the American-led order for 70 years”.2 The pandemic is likely to speed up this process.

— The US handling of the pandemic has been, at best, ineffective and shows its decreasing appetite for multilateralism and global governance. —

The US handling of the pandemic has been, at best, ineffective and shows its decreasing appetite for multilateralism and global governance. This culminated in the halting of funding for the WHO, but also included blocking the WTO’s dispute-settling mechanism, defunding UN institutions and programs, and criticizing NATO.

1 Krepinevich, A., 2017, “Preserving the Balance: A U.S. Eurasia Defense Strategy”, Center for Budgetary and Strategic Assessment. 2 Schake, K., 2018, “The Trump Doctrine Is Winning and the World Is Losing”, New York Times. 3 Jackson, E. et al., 2020, “What Foreign-Policy Experts Make of Trump’s Coronavirus Response”. DIGITALIZED AND PRIVATIZED: GEOPOLITICS IN THE PANDEMIC 6

CONFRONTATION IS INCREASINGLY IMPACTING PRIVATE COMPANIES

Friedrich Engels stated that the character of war changes This is seen in the clash between the digital infra- with the character of the economy. In slave-owning structure developed in Silicon Valley and that developed societies, the goal of war was to capture more slaves, in China. The former, designed around market dictates, whereas in industrial societies, the goal was to capture takes advantage of the under-governed digital economy more resources and access to new markets.4 Today, we to place tremendous value on the data collected and live in a knowledge economy, or perhaps an attention generated online, while the latter uses these same data economy, where the key economic winners are the big as a tool of social, political and economic control. Indeed, technology companies. One manifestation of this was seen China is actively exporting this model to illiberal and in January 2020, when the value of Apple surpassed that autocratic regimes tempted by the power of online control. of the DAX30, Germany’s thirty most valuable companies. The ongoing controversy over allowing Huawei to build This trend is likely to increase in the future. Much of the 5G-networks in Europe is a case in point. Under pressure innovation in tomorrow’s technologies is concentrated from the US, the UK changed its position and banned in the big technology firms, which are predominantly telecom providers from using Huawei and required them based in the US and in China. Europe is lagging behind, to remove all their components by 2027.6 Another with European firms capturing only 11% of global example is the US Department of Commerce requiring venture capital in 2016, and only four of the top 100 AI all semiconductor firms using US equipment to apply startups in 2018.5 The increasing importance of the for licenses to sell to Huawei.7 The move has arguably technological domain is accompanied by increasing targeted the TSMC (Taiwan Semiconductor Manu- geopolitical competition. This has given rise to a facturing Facility), which is Huawei’s main supplier for technological arms race, in which states are leveraging semiconductors and would set them at a clear dis- their national capabilities to gain ownership of every- advantage.8 This shows how private companies are thing from data, talent, companies and access to the increasingly a battleground, as tomorrow’s power will materials needed for production. stem from those controlling and innovating in mostly civilian sectors.

4 Peralta, A. 2005. Med andra medel: från Clausewitz till Guevara: Krig, Revolution, och Politik I en marxistisk idétradition [By other means: From Clausewitz to Guevara; War, Revolution, and Politics in a Marxist ideational tradition]. Munkedal, Sweden: Glänta Produktion, p.96. 5 Bughin, J. et al., 2019, “Tackling Europe’s Gap in Digital and AI”, McKinsey Global Institute. 6 Kelion, L., 2020, “Huawei 5G kit must be removed from UK by 2027”. 7 US Department of Commerce, 2020, “Commerce Addresses Huawei’s Efforts to Undermine Entity List, Restricts Products Designed and Produced with U.S. Technologies”. 8 Blank, S., 2020, “The Chip Wars of the 21st Century”, War on the Rocks. DIGITALIZED AND PRIVATIZED: GEOPOLITICS IN THE PANDEMIC 7

CONFRONTATION IS INCREASINGLY DIGITALIZED

Geopolitical confrontation is not only about strategic The pandemic in and of itself has created a notable ownership and access to material, but also operates on increase in disinformation, cyberattacks and cyber the platforms of big technological companies. Facebook intrusions. The president of the European Commission and Google are information networks that have become Ursula von der Leyen surprised many when she openly the infrastructure through which we understand the world, called China out for cyberattacks against hospitals and perceive power, and legitimacy. As Sara Smyth puts it, healthcare institutions in Europe.14 The European External “the process of collecting and organizing information Action Service initiative to combat disinformation is now a tremendous source of economic, political and EUvsDisinfo stated that, in the pandemic, cultural power. Data makes us more malleable, easier to — predict, and extremely prone to influence”.9 Despite their potentially grave

Moreover, their business model is premised on their ability impact on public health, official and to manipulate flows of information through advertising.10 state-backed sources from various Consequently, the big social media platforms are governments, including Russia and—to becoming increasingly contested spaces, which is a lesser extent—China, have continued enabled by them being treated as platforms free from to widely target conspiracy narratives editorial responsibility. This changes the preconditions 15 for power in the twenty-first century as algorithms and disinformation. become paramount in national and international — struggles.11 This includes, of course, the Russian influence Despite their potentially grave impact on public health, operation targeting the US 2016 election, which used a official and state-backed sources from various govern- combination of cyber intrusion, subversion and dis- ments, including Russia and—to a lesser extent—China, information, as well as inorganic amplification of have continued to widely target conspiracy narratives divisive content.12 However, focusing on foreign influence and disinformation.15 Increasing uncertainty in the operation misses the bigger point of the digitalization cyber domain will continue in the lead-up to the 2020 of political competition. The Trump campaign’s Project US election and, potentially, affect its outcome. Trump Alamo and cooperation with Cambridge Analytica shows is already contesting the legitimacy of the election as “the how the use of large-scale databases of voter information most corrupt election in the history of our country” due could be used to target political messages using psycho- to the use of mail-in ballots necessitated by the pandemic.16 graphic models.13 The outcome of the US election will not only impact the US, but also the international order as we know it.

9 Smyth, 2019, “The Facebook Conundrum: Is it Time to Usher in a New Era of Regulation for Big Tech?”, International Journal of Cyber Criminology, Vol.13, No.2, pp.578-595. 10 Skok, D. & Owen, T., 2020, “Matt Stoller on Taking on the Tech Goliaths”, Big Tech. 11 Jonsson, O., 2020, “Putting Modern War in Perspective”, in Jonsson, O. (ed.), Modern Warfare: New Technologies and Enduring Concepts, Stockholm Free World Forum. 12 Mueller, R. S., 2019, “Report On The Investigation Into Russian Interference In The 2016 Presidential Election”, U.S. Department of Justice. 13 Cadwallr, C. & Graham-Harrison, E., 2018, “Revealed: 50 million Facebook Profiles Harvested for Cambridge Analytica in Major Data Breach”, The Guardian; and Winston, J., 2016, “How the Trump Campaign Built an Identity Database and Used Facebook Ads to Win the Election”, Medium.

14 Cerulus, 2020, “Von der Leyen Calls Out China for Hitting Hospitals with Cyberattacks”, Politico. 15 EUvsDisinfo, 2020, “Short Assessment of Narratives and Disinformation around the COVID-19/Coronavirus Pandemic”. 16 Vazquez, M. & Judd, D., 2020, “Trump Predicts ‘Most Corrupt Election’ in US History While Making False Claims about Mail-in Voting”, CNN. DIGITALIZED AND PRIVATIZED: GEOPOLITICS IN THE PANDEMIC 8

IMPLICATIONS

• China and Russia are furthering their positions while • The algorithms of big tech companies are key for all the current order, and the US leadership, is weakening. actors to influence perceptions of legitimacy, power China, which has purposefully acquired strategic and influence. Contention in this space has increased infrastructure, resources and companies in Europe in the pandemic and will continue to do so due to a and Africa, is now intent on leveraging relevant lack of appropriate safeguards. This can challenge political benefits. Russia is increasing its non-military legitimacy and potentially the outcome of the US effort to subvert Western unity. All of this reinforces election. the need for the EU to assert its strength as a geopolitical actor, which it has so far been unable to do.

• Geopolitical competition between the great powers is increasingly playing out in a technological arms race involving private companies. The chosen infrastructure is now inseparable from this global power struggle. This risks splitting the internet and global supply chains in two, thus forcing Europeans to choose from the US or China as seen in the 5G-case. THE NEW DIGITAL DOMAIN 9

DRIVERS AND IMPLICATIONS OF THE DIGITAL ECONOMY DRIVERS AND IMPLICATIONS OF THE DIGITAL ECONOMY 10

— The skyrocketing performance of stocks like Amazon, Netflix and Zoom, while financial markets were crashing, was tangible evidence of this divergence, amplified by the unconventional monetary policies adopted by central banks across the world. —

The years before the COVID-19 outbreak saw a wide Slow adoption and adaptation are typical of general technological gap opening between frontier and non- purpose technologies (GPT) that radically transform the frontier firms. This became more evident during the structure of the economy. GPTs, like the steam engine, Great Lockdown when different digital platforms electricity and IT, have spurred all the industrial provided customers with goods and services no longer revolutions of the past.18 And now it is AI’s turn. available on traditional markets. The skyrocketing However, it takes two or three decades for a GPT to performance of stocks like Amazon, Netflix and Zoom, become widely adopted, giving a significant competitive while financial markets were crashing, was tangible advantage to early users that can expand the scale and evidence of this divergence, amplified by the uncon- scope of their production, while innovating and ventional monetary policies adopted by central banks consolidating their advantage over time. For example, across the world. it took more than two decades for electricity to surpass steam (in terms of share of total horsepower in manu- At the heart of the pre-COVID technological decoupling facturing), and almost four decades to become the was the emergence of AI, which can be seen as the undisputed source of power generation. engine at the heart of the Fourth Industrial Revolution. The OECD has reported that, over the last decade, new technologies developed at the global technological frontier were spreading faster than ever. However, they were taking more time to be adopted by a critical mass of firms within any given economy and many existing technologies remained unexploited by a non-trivial share of firms. For Small and Medium Enterprises (SMEs) in traditional sectors, which account for more than 90% of all active firms across OECD countries, intelligent robots or Big Data are hardly affordable, accessible or necessary.17

17 Andrews, D., Criscuolo C. & Gal, P., 2015, “Frontier Firms, Technology Diffusion and Public Policy: Micro Evidence from OECD Countries”, OECD Productivity Working Papers, No. 2, OECD Publishing, Paris. 18 Jovanovic, B. & Rousseau, P., 2005, “General Purpose Technologies”, in Aghion, P. & Durlauf, S., Handbook of Economic Growth. DRIVERS AND IMPLICATIONS OF THE DIGITAL ECONOMY 11

TECHNOLOGICAL GAP WIDENS DUE TO COVID-19 ACCELERATES DIGITALIZATION IMPLEMENTATION LAGS AND WIDENS GAPS

To make use of electricity, governments had to invest When the Great Lockdown froze the global economy for in nationwide electric grids; entrepreneurs had to invent several weeks, only the companies that had already complementary technologies like light bulbs, cables, and invested in digital operating models could guarantee switches; bureaucrats had to agree on standards such continuity to their business operations. While in the as the voltage of the current and the shape of the plug. pre-crisis years most firms of a sufficient size had moved The full potential of a GPT often remains unknown for towards a digital core based on software, data, and years as companies have to commit money, time and digital networks, only some had reached sufficient attention to their development without knowing digital capacity to transition to a new business model whether the world will actually go that direction. almost overnight. The pandemic has not only exposed Companies must duplicate costs to experiment with new the wide technological divide between those who were processes and models while still preserving their ready for hybrid business models and those who were traditional procedures. Autonomous cars, for example, not, but it has also sharply accelerated the pre-existing already absorb a lot of resources but are not yet move towards digitalization. commercially available.19 — Implementation delays might explain why the Digital According to McKinsey, Revolution is not showing up in productivity statistics. Whether from the point of view of output per hour the world has vaulted five years worked or from that of total factor productivity, since forward in consumer and 2010, productivity has been growing at its slowest pace business digital adoption in in five decades. The US has never granted as many around eight weeks.22 patents as it has in recent years—records date back to 1790— — but this technological dynamism does not necessarily translate into higher growth immediately because it takes time for companies to turn inventions into According to McKinsey, the world has vaulted five years marketable products and to adapt their production and forward in consumer and business digital adoption in organizational processes accordingly.20 There is also a around eight weeks.23 Banks have shifted to remote sales problem of mismeasurement. Standard statistics struggle and service teams for even the most traditional activities. to capture the scale of these activities because AI-related Grocery stores have shifted to online ordering and innovation is often the outcome of intangible invest- delivery as their primary business. Schools moved to ments (like software, databases, R&D, design, training, online learning and digital classrooms. Several companies etc.). National accounts, despite recent improvements have launched analytics and AI initiatives in their in this sense, continue to treat some forms of investment operations. Moreover, smart working arrangements have in intangibles not as investment but as intermediate become widespread, at least among some professions. goods, thus subtracting value from final output.21

19 Campanella, E., 2018, “The Real Payoff From Artificial Intelligence Is Still a Decade Off”, Foreign Policy, 9 August. 20 Brynjolfsson, E. & Rock, D., 2017, “Artificial Intelligence and the Modern Productivity Paradox: A Clash of Expectations and Statistics”, in Agrawal, A., Gans J. & Goldfarb A. (Eds.) Economics of Artificial Intelligence. 21 Haskel, J., & Westlake, S., 2017, Capitalism without Capital: the rise of the intangible economy, Princeton University Press. 22 Baig, A. et al., 2020, “The COVID-19 Recovery Will be Digital: A Plan for the First 90 Days”, McKinsey Digital, 14 May. DRIVERS AND IMPLICATIONS OF THE DIGITAL ECONOMY 12

IMPLICATIONS

The post-COVID world will likely see rising tensions and • Laggards. The laggards, especially the smallest ones competition between the technological leaders, adopters in the sectors hit hardest by the health crisis, risk and laggards. falling further behind. Given the financial strain caused by the pandemic, they will be unable to invest • L e a d e r s . The most dynamic and innovative tech significant resources necessary to catch up with new companies will take advantage of these changes, technologies that in many instances look too sophisti- pushing the technological frontier outward. Pioneers cated for their needs. Economically, this implies a also enjoy a first mover’s advantage as they become widening in the technological gap that could further infrastructure, as Apple’s App store and Amazon as a erode their market share, especially if new actors enter marketplace.23 Even if AI-related business activities and attempt to revolutionize sectors where a lack of remain the prerogative of a handful of companies, physical proximity seems impossible to overcome. the number of active venture-backed US private companies developing AI systems is now fourteen • Regulators. Governments will have to perform a times higher than in 2000. complicated balancing act. On the one hand, they need to create an innovation-friendly environment to • Adapters. At the same time, firms that have used the attract talent, funds and firms that are key for their health crisis as an opportunity to update and upgrade countries to grow. On the other hand, they need to their business model will have great incentives to introduce light regulation in disrupted sectors to allow speed up their digital transition. For these experiments laggards to adapt. Very often, as was the case in Europe to become permanent, firms need to make significant with Uber, innovators in traditional industries not investments in digitalization, but the benefits will not only enjoy a technological advantage over the manifest immediately. Transforming business processes incumbents, but disrupt existing business models such and models requires the acquisition of new organi- that they may catch regulators by surprise. As a result, zational and managerial skills, while cost structures they often do not play by the rules, posing entirely duplicate as investments in new digital assets and new regulatory issues. Responding swiftly and quickly capabilities overlap with existing business processes, to this kind of challenge is key to create a level playing targeting the same customers and competing for the field and prevent an innovation backlash. same revenues. Among the least innovative players, only the largest ones will be able to undertake this kind of transformation.

23 Warren, T., 2020, “Apple Has Finally Met its Fortnite Match”, The Verge, 14 August. THE NEW DIGITAL DOMAIN 13

A FRACTURING SOCIAL CONTRACT A FRACTURING SOCIAL CONTRACT 14

PREINDUSTRIAL SECOND PERIOD TECHNOLOGICAL REVOLUTION FIRST TECHNOLOGICAL REVOLUTION INEQUALITY

INCOME PER CAPITA

Source: Milanovic, B., 2017, Global Inequality: A New Approach for the Age of Globalization, Harvard University Press.

In the last two decades, the world has found itself in what The widening wealth and income gap is, in a way, the economist Branko Milanovic called the second modern societal flipside of the technological gap discussed Kuznets curve—an inverse relationship between economic in the previous section. The first who can ride a new development and income disparities.24 In the sixties, the economic paradigm enjoy a sort of rent until the rest Nobel laureate Simon Kuznets argued that inequality adapt. Innovators employ qualified professionals within rises during rapid industrialization when workers are booming sectors, giving them large slices of a fast- plentiful and wages are low, but then falls when the slack growing cake. Innovation not only boosts the wages of in the labor market is absorbed. When Kuznets developed those who fuel it but also erodes the middle of the jobs this theory, the wave of inequality that had started in pyramid, first routinizing and then automating the nineteenth century with the First Industrial Revolution middle-skilled tasks like sales, bookkeeping or repetitive was on its downard trajectory and under control. production activities.25 These tasks are usually associated with routine tasks that follow predetermined rules and — procedures—something computers or machines can By the 1970s, two world wars, the easily automate. Complex, non-routine cognitive and political upheavals of the 1960s, and manual activities, instead, can hardly be coded into a software. Engineers or biotechnologists, for example, growth in the number of college usually possess a combination of analytical and problem- graduates in Western countries had solving abilities that, at least for now, cannot be compressed inequality significantly. replicated by any form of artificial intelligence. Equally, — low-skilled services like cleaning and gardening, health support or childcare, which require substantial situational By the 1970s, two world wars, the political upheavals of adaptability, physical ability and oral communication, the 1960s, and growth in the number of college graduates must be performed in person. As a result, jobs tend to in Western countries had compressed inequality be concentrated at the tail of the occupational skill significantly. Since then, however, the world has been distribution, where both the degree of routinization and riding a new Kuznets wave and the technologies of the the probability of automation are lower. This techno- Fourth Industrial Revolution—AI, robotics, and so logical process, along with globalization, explains why forth—are further widening the gap between the highly in recent years the middle class has been squeezed in skilled and everyone else. the West.26

24 Milanovic, B., 2017, Global Inequality: A New Approach for the Age of Globalization, Harvard University Press. 25 Autor, D., “Why Are There Still So Many Jobs? The History and Future of Workplace Automation”, Journal of Economic Perspectives, Vol. 29, n. 3, 2015 26 Manyika, J. et al., 2020, The Social Contract in the 21st Century: Outcomes So Far for Workers, Consumers and Savers in Advanced Economies. McKinsey Global Institute, February. A FRACTURING SOCIAL CONTRACT 15

Kuznets waves, at least in their upward trajectory, also The hollowing out of the middle of the income distri- pose a vast political challenge. The social contract—that bution has also led to the hollowing out of the political in the US was centered around social mobility and in spectrum, with growing support for extreme parties on Europe around economic security—looks broken. In the both left and right.29 Politics, particularly in Europe and US, over the last fifty years a child’s chances of out- North America, is seeing a double challenge as the center earning his or her parents have fallen from almost 90% collapses, with increasing polarization within countries to 50%.27 At the same time, permanent employment and and the rise of illiberal populism, underpinned by a generous pension benefits are often a mirage for younger declining belief in democracy and declining trust in the Europeans. Moreover, innovation can instill fear in those media. In the US, the proportion of citizens who believe struggling to keep up with the changes ushered in by that it is essential to live in a democracy has declined new technologies. Older people can feel inadequate in across the generations, from 72% of those born before a world that changes too fast. The left-behind were the the Second World War to a mere 30% among millennials.30 most vulnerable to the nostalgic rhetoric deployed by Declining support for democracy is repeated in a number both Trump and Brexiteers, deluding voters that the of other countries, such as Great Britain, the Netherlands, present could accommodate a past that no longer exists. Australia and New Zealand. These results are mirrored The former promised to Make America Great Again, while by a Cambridge University study whose main conclusion the latter believed that London, once divorced from was that the share of those dissatisfied with democracy Brussels, would restore the glories of the British Empire.28 has increased by around +10% points from the mid-1990s to 58% in 2020.31 Similarly, trust in the media is also — falling and the only source of media a majority (57%) 32 The hollowing out of the middle of the now trusts in EU countries is the radio. income distribution has also led to the hollowing out of the political spectrum, with growing support for extreme parties on both left and right.29

27 Chetty, R. et al., 2016, “The Fading American Dream: Trends in Absolute Income Mobility since 1940”, NBER Working Paper No. 22910, December. 28 Campanella, E. & Dassu E., 2019, Anglo Nostalgia: The Politics of Emotion in a Fractured West, Oxford University Press. 29 Muñiz, M., 2019, “A New Social Contract for the Digital Age”, in Work in the Age of Data, BBVA Openmind, No.12. 30 Foa, R. & Mounk, Y., 2017, “The Signs of Deconsolidation”, Journal of Democracy, Vol. 28, No.1, pp.5-16. 31 Center for the Future of Democracy, 2020, “Global Satisfaction with Democracy 2020”, University of Cambridge. 32 European Commission, 2019, “Media Use in the European Union”. A FRACTURING SOCIAL CONTRACT 16

COVID-19 NOT A GREAT LEVELER

Kuznets waves are nothing new. They move in cycles furloughed staff were are recorded as unemployed in and pandemics are often one of the forces to bring them the US. Finally, to add insult to injury, the wealth of under control. For centuries, inequality fluctuated with America’s billionaires increased by at least 10% in March demographic forces or territorial conquests. From and April. pharaonic Egypt to Czarist Russia, Victorian England, the Ottoman Empire, and China under the Qing Dynasty, Available evidence suggests that the risk of falling the pattern has been the same: wealth tends to seriously ill from COVID-19 in the West is higher among concentrate in the hands of a privileged elite. However, individuals with lower income and lower levels of income and wealth disparities have never been constant education. Mobility data for the US analyzed by the New over time. Long stretches of high inequality were York Times shows that the wealthy limited their mobility followed by bursts of violent compression, owing to sooner and more drastically than the bottom 10%, thus cataclysmic events such as wars, revolutions, natural reducing their exposure.35 While millions of white collar disasters and pandemics. At least in theory, viruses, workers can work from home, essential workers like bacteria and germs are perfect equalizers, blind to cashiers, bus drivers or street cleaners have been forced wealth, class, age, gender and race.33 to show up at work, thus exposing themselves to the contagion. According to estimates, no more than around — 30-35% of jobs can be fully or mostly performed from However, COVID-19 looks like an home and these jobs include the most highly-qualified exception, exacerbating inequality. professions.36 In their attempts to flatten the What’s more, while governments will emerge from the epidemio-logical curve, governments pandemic with historic levels of debt, the digital firms have unintentionally upended the that have captured the majority of recent growth remain livelihoods of the least advantaged. largely untaxed. This revenue cap in the digital economy — exists at the national level, where sales tax for goods and services provided by digital platforms are often not However, COVID-19 looks like an exception, exacerbating collected, and at the international level, where the global inequality. In their attempts to flatten the epidemio- corporate tax revenue on digital firms ends up in the logical curve, governments have unintentionally hands of a small number of states. This disconnect, upended the livelihoods of the least advantaged. In March between the engines of growth in the economy, and alone, the US economy destroyed more jobs than over those governments mandated with delivering on their the entire Great Recession, with workers with less than social contracts risks exacerbating tensions within and a college education, such as shopkeepers, waiters and between societies. hairdressers, taking the largest hit.34 In Europe, by contrast, official unemployment numbers did not show an equally catastrophic rise due to furlough, as

33 Scheidel, W., 2017, The Great Leveler: Violence and the History of Inequality from the Stone Age to the Twenty-First Century, Princeton University Press. 34 Tappe, A. & Kurtz, A., 2020, “The US Economy Lost 701,000 Jobs in March — Worst Report Since 2009” 35 Jennifer Valentino-DeVries, Denise Lu and Gabriel J.X. Dance, “Location Data Says It All: Staying at Home During Coronavirus Is a Luxury”, New York Times, 3 April 2020. 36 Dingel, J. & Neiman, B., 2020, “How Many Jobs Can be Done at Home?”, Becker Friedman Institute, University of Chicago, 19 June. A FRACTURING SOCIAL CONTRACT 17

IMPLICATIONS

In the short term COVID-19 will likely exacerbate • Agile work. The widespread use of smart working inequality, and even more so if governments are forced arrangements provides better opportunities for higher to scale down employment protection schemes to absorb skilled labor but could also foster inclusion. New the COVID-19 shock to public finances. A substantial technological platforms that facilitate working from increase in unemployment would be a boon for illiberal home may push companies to hire people with populists, who could run once again on anti-establishment disabilities, reduce geographical distances and favor platforms and radical political agendas that will attempt people—mainly women—who take care of children, to stifle globalization and technological change. In the and elderly or unwell family members. medium term, COVID-19 could actually mitigate income disparities through at least three channels: • Essential workers. The pandemic has shown the key role played by low skilled workers, who at the peak of • Urban hierarchies. Smart working arrangements that the pandemic became essential workers. In many shorten distance can alter urban hierarchies between cases, and especially those employed in the gig the core and periphery. If new digital technologies economy, such workers tend to be both under- allow us to reap part of the typical network effects of protected and underpaid. It is tempting to argue that booming cities from a distance, then the agglomeration this is because new technologies increasingly kill costs of living in crowded and expensive cities might medium- and low-skilled jobs, while boosting the outweigh the benefits, pushing even qualified wages of the most qualified. In reality, the marginal- professionals towards smaller towns where they can ization is the outcome of a political and institutional enjoy higher standards of living. The repopulation of failure in which taxes and social security have both less developed areas might contribute to closing been lowered. Governments should rethink social regional divides that have contributed to the security to include essential workers and force emergence of populism across the West in recent innovative firms to fairly remunerate them by giving years, while also creating new job opportunities for up on part of their rent of position. the least qualified workers living on the periphery. According to Enrico Moretti, each qualified job produces at least five less qualified ones, raising the standard of living for all the individuals residing in the same area.37

37 Moretti, E., 2012, The New Geography of Jobs, Mariner Books. THE NEW DIGITAL DOMAIN 18

CONTACT TRACING AND TECHNOLOGICAL SOVEREIGNTY CONTACT TRACING AND TECHNOLOGICAL SOVEREIGNTY 19

Governments around the world are looking to techno- TECHNOLOGICAL CHOICES—CONTACT logical solutions for tracking the spread of the virus, TRACING VERSUS EXPOSURE NOTIFICATION stepping into the nexus of global platform power, data regulation and technological sovereignty. Contact There is a wide range of technological options for tracing is also an illustration of the digital economy, achieving the broad contact tracing and exposure power in the digital era and the relation between the notification aims. Where governments end up on these public and private in the twenty-first century. choices reveal deep tensions in the relationship between our technological infrastructure and state power. The As the world begins to consider reopening, it has become two main options are Bluetooth Low Energy-Based conventional wisdom that, until a vaccine is developed, Contact Tracing and BLE-Based Exposure Notification. the safest way to resume economic and social activity While similar in intent, they reveal a conflict in the is through a process of testing and tracing the population. relationship between national control of digital services Contact tracing is a disease control measure that has and the power of big tech in setting global technology been used for decades, but now the promise is that it standards. can be turbocharged by technology. Instead of a public health worker conducting a lengthy interview with BLE Contact Tracing uses BLE to signal nearby devices. someone who has tested positive for COVID-19 to When two devices come into close proximity, they reconstruct where they’ve been, an individual who has exchange anonymized IDs (long sets of randomized tested positive or a public health department could draw characters) that are then stored in contact logs on their on data from a tracing app downloaded to such a person’s individual devices. Upon diagnosis, users may voluntarily mobile device. Using these data, they would know upload their contact logs, along with their general exactly where the device’s user had been and who they location (e.g. the first half of their postal code), to a had been in contact with. This same data—either stored central server, allowing health authorities to track only on the individual’s device, or centralized—could outbreaks and alert other users if they have come into also be used to notify the user if they had been close to contact with an infected individual. Variations of this someone who has tested positive (exposure notification). model are possible; for instance, AI may be used to The platform or government managing the application predict a user’s unique risk. could also upload the data from many individual users to a centralized authority, creating a society-wide data The BLE-Based Exposure Notification system also set. Such a system could not only collect location data uses BLE to signal nearby devices, but unlike in contact but also draw on other data about users to build tracing, each user’s contact log is stored only on their sophisticated epidemiological models. Finally, to better individual device. Only the anonymized tokens of those understand this vast wealth of public health data, they diagnosed are uploaded to a central server. This model could deploy AI to study patterns of spread, and to learn aims to minimize privacy risk through better data about the virus. protection and uses Apple/Google’s exposure notification model, which is based on the Decentralized Privacy- How governments have managed the procurement, Preserving Proximity Tracing (DP-3T) protocol. While development and policy choices surrounding contact contact tracing offers the promise of centralized tracing and exposure notification reveals real challenges authority, national control and potentially far great to the state’s technological capacity and ultimately epidemiological insights, it comes with significant data sovereignty in the digital domain. privacy concerns. Exposure notification using the Apple/ Google protocol provides a decentralized model that better protects user data, but at the cost of national control. CONTACT TRACING AND TECHNOLOGICAL SOVEREIGNTY 20

PRIVACY SOVEREIGNTY TRADE-OFF

The UK tried to launch its own Bluetooth contact tracing security threats and potential for wrongful surveillance app in June, having rejected Apple/Google’s approach. of users’ devices, since Bluetooth signal is openly broadcast. The app would include personally-identifiable data collected by the UK’s manual contact tracing system and A wide range of countries has instead adopted the BLE- would have been retained for 20 years. However, they Based Exposure Notification system developed on top could not implement a functioning version of the app of the Apple/Google protocol. Switzerland and Italy have and pivoted to the Apple/Google one.38 France also deployed apps incorporating this framework. While 70% recently launched its own contact tracing app with a of Swiss residents intend to download their country’s centralized framework, with contact logs being uploaded app, only 44% of Italians say they will probably or to a central server. The majority of the other European certainly download theirs. Other European countries, states has relied on the Apple/Google-protocol. including Germany, Latvia and Estonia, are preparing to roll out their own Apple/Google-based apps in the Security and privacy experts have raised significant coming weeks. Several US states and a total of 23 concerns about both apps. In France, 471 cryptography countries have requested Apple/Google’s API. On the and security researchers (77 of whom are directly one hand, two private companies, Google and Apple, affiliated with Iria, the French app’s developer) are deciding by themselves for how 3.2 billion smart- emphasized the privacy vulnerabilities inherent to both phones can and cannot be used to combat a global health contact tracing and exposure notification and called for emergency, and large European states seem unable to greater transparency and oversight for the app. exert the technological sovereignty to implement Singapore’s Bluetooth app, praised for its rapid deploy solutions in their own countries. On the other, the ment and apparent initial success, has only been countries that want to achieve technological sovereignty downloaded by 40% of residents, with many citing and have chosen a contact tracing model over Apple/ privacy concerns and poor functionality since the app Google’s exposure notification are undermining the only works on Apple devices if it is kept open at all times. broader positions on data privacy.

Over 300 academics across 26 countries strongly argued States adopting the Apple/Google API will need to against a centralized contact tracing model, jointly contend with the power they delegate to private outlining its vulnerability to security breaches, massive companies over public health and security, especially data collection, and possible surveillance after the as companies have already rejected demands from other pandemic, given inadequate legislative protections. This federal governments relating to contact tracing. Since kind of “mission creep” (unintended app use or data clear terms of use and explanation of data collection are abuse) could represent an overextension of government the mandate of individual developers, governments power and surveillance. Moreover, since contact logs using the Apple/Google API must ensure companies are uploaded to the server, malicious actors would only comply with strict provisions of use and purpose, data need to target the central server, rather than individual governance, and privacy protections. The inability of accounts or devices. IDs generated by global tokens the largest European states to create and implement stored in the server could be decrypted to re-identify their own protocol must also be seen as a failure of a the users listed in the logs. To successfully perform cornerstone of the European Commission’s strategy to contact tracing, authorities must request location become a “global digital player” and to achieve “techno- information. Since even general, area-based location logical sovereignty”.39 This underlines the power shift data can readily re-identify users, authorities will have from states into the hands of the largest technological access to highly sensitive identifying information. companies, who act without the accountability that Experts have also warned that such apps could result in governments (generally) have.

38 Smout, A., 2020, “UK Ditches Homegrown COVID-19 Tracing App to Use Google-Apple Model”, 18 June. 39 European Commission, 2020, “The European Digital Strategy”. CONTACT TRACING AND TECHNOLOGICAL SOVEREIGNTY 21

IMPLICATIONS

• Not all the technologies available for use in implementing complex technology platforms: it fighting COVID-19 are equal or interchangeable. doesn’t always end well. There is a big difference between centralized contact tracing, whereby data about a society is collected en • Tech policy can entrench power. There are economic masse and used by public health authorities to control and political factors underlying our decisions around the epidemic, and exposure notification apps, which these technologies. Big tech has got bigger during the tell an individual user whether they may have been pandemic, and these companies have long lusted for near someone who has tested positive. the data troves of the financial sector and the health system. We need to be weary of entrenching this trend. • There is a huge gulf between promise and implementation, which directly affects the • The deployment of contact tracing technologies calculation of trade-offs. Governments must look can embed new governance norms, that can closely at the challenges of implementing digital reinforce or exacerbate inequities and abuses. contact tracing. If either the system’s design or Contact tracing might seem like a good idea to a operation fails, any trade-off between civil liberties wealthy computer programmer in Palo Alto, or a civil and public health or between data privacy and servant in Ottawa. It may look very different to collective good is moot. In terms of design, contact communities that have long experienced the costs of tracing is not simply an app that can be quickly data being weaponized against them and that are developed and rolled out (although there are many already disproportionately harmed by from COVID-19. such products on offer), but rather a product more akin to a platform: a system that needs to reliably collect, store and manage very large data sets and sustain a vast network infrastructure. How this system is designed will have widespread downstream effects on the utility of the exercise. As for implementation, governments are proposing national rollouts of a very intrusive and complex technological platform that demands 60 percent adoption among the population to be effective. It is worth noting that no country currently working with voluntary digital contact- tracing systems has hit this target yet. We also must keep in mind the track record of governments THE NEW DIGITAL DOMAIN 22

RECOMMENDATIONS AND TOPICS FOR EXPLORATION RECOMMENDATIONS AND TOPICS FOR EXPLORATION 23

The world is again facing a yawning gap between the or control over their personal data. By contrast, the social, economic, and political challenges and the design of our governance systems designed to meet them. EU’s General Data Protection Regulation offers a Questions about digital governance are central to how higher degree of control to individuals on questions we reconstruct our post-pandemic world. Digital of privacy and the use of their data. From an inter- technologies and the coronavirus are both manifestations national perspective, the biggest problem is that the of an era of under-managed hyper-globalization, and three zones cannot “talk” to one another. As a result, the pandemic threatens to deepen the economic, no tech firm can be truly global, because it has become geopolitical, and technological divide between the impossible to comply with the rules of one zone United States and China.40 Managing the adverse effects without violating those of the others. of the dynamics of the digital domain requires holistic approaches to platform and data governance. For too • We should consider a universal declaration on AI, long, and on too many issues, the governance of techno- given existing inequalities in access to data and logy has been left solely to those who design it. Instead, analytic capacities, not to mention the far-reaching we need to think critically about how the deployment potential for misuse. Algorithms are not value-free. of digital technology in our society bumps up against The data upon which they rely and the formulae our existing democratic laws, norms and regulations, guiding their decisions reflect their designers’ and how it could change them. historically and socially conditioned biases. Fortunately, an ethical framework for algorithms and Data governance needs to be embedded in a much AI can be universalized in the same way that personal broader policy agenda that includes international protections have been through the Universal politics, competition policy, content moderation policies, Declaration of Human Rights and other agreements. and a host of data rights issues. This poses formidable challenges for governments and private companies alike. • Our ability to arrive at common understanding of facts and events is being undermined. To mitigate an This report is the starting point of a multi-year effort epistemological crisis, we need an information space from the Center for the Governance of Change that will that is treated as a common good rather than information research the drivers and implications of the digital and flows manipulated for profit. The information space data economy and the fracture of the social contract, as also needs to be protected from increasing attempts well as advance new solutions for governance and society. to manipulate it from foreign influence.

The following topics of exploration are intended to • We need a Digital Stability Board to shape global serve as a basis for further research. standards, regulations, and policies across the platform economy. This new body could offer advice on best practices, as well as insights about the GLOBAL GOVERNANCE regulatory and policy actions needed to address vulnerabilities in a timely manner. It could monitor • The world needs a new forum for diplomatic and global risks arising from new technologies—including their coordination to overcome the geographic balkanization impact on civil society—and develop regulatory and of data governance. The state-centric China zone and policy interventions to address them, and it could the firm-centric US zone are mirror images of each ensure that its efforts complement the work of other other: in neither case do individuals have sovereignty institutions, such as the World Trade Organization.

40 Medhora, R. & Owen, T., 2020, “A Post-COVID-19 Digital Bretton Woods”, Project Syndicate, 17 April. RECOMMENDATIONS AND TOPICS FOR EXPLORATION 24

ECONOMIC GOVERNANCE SOCIAL CONTRACT • The digital economy is driven by proprietary techno- • Above handling the economic fracture, improving the logy, most of which is created in a few hubs around social contract needs to be done with efficient and the world. It is the nature of the innovation economy transparent governance that are counteracting the to privilege first movers, strategic behavior, and worst aspect of the social fracture. economies of agglomeration. We see the need to create a level playing field for innovators and laggards • As large technology companies are increasing in size, through fair taxation of large tech and smart/agile the status quo of an untaxed and largely unregulated regulations to tame the impact of technological dis- digital economy is no longer tenable. These companies ruptions in more traditional sectors. This might entail are using public utilities: they are providing the services making sectoral regulation applicable to bigtech but not properly taxing their gains from those markets companies or levelling down requirements for all to and thus reducing the tax base from which to provide boost innovation. social goods. We need to develop a new global regime to address the problem of tax arbitrage by multi- • Laggards must be provided with fiscal incentives to nationals whose value is derived largely from the adopt new technologies, while launching informative intangible economy. campaigns to make SMEs aware of the true potential of digital technologies for their businesses. • There are opportunities for smart working arrangements to counter the adverse effects of urbanization. • To push workers away from large cities and create more We recommend promoting and regulating smart geographically balanced development models, govern- working arrangements to ensure that they foster ments should build adequate digital infrastructure in inclusion. peripheral areas, provide tax credits for relocation and incentivizing smart-working arrangements • Education is the most effective tool for social mobility, but its costs are increasing while curricula are slow to • Governments should envisage new ways to protect adapt to the changing needs of the digital economy. workers in the gig economy, offering them the same It is crucial to provide effective, updated and affordable forms of socio-economic security enjoyed by ordinary education for citizens. workers. Trade unions should promote the interests of this group. THE NEW DIGITAL DOMAIN 25

AUTHORS: RECOMMENDED CITATION:

Oscar Jonsson, CGC, The New Digital Domain. How the Academic Director, Center for the Pandemic Reshaped Geopolitics, the Social Governance of Change at IE University Contract and Technological Sovereignty. Ulrico Edoardo Campanella, Madrid: Center for the Governance of Change, Future World Fellow, Center for the IE University, 2020 Governance of Change at IE University

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cgc.ie.edu